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Demonetisation: A Skeptical Manifesto Part 2

My previous blog post ended with the question why the cash crunch has not eased even now, 5 weeks into demonetisation; cash woes are unlikely to end by the December 30 deadline announced by the government.

However inefficient and lethargic the printing of notes, by now a certain number should have come into play, which should have improved the situation in a non-linear way as (a) it should have broken the psychology of hoarding and (b) if there are less notes but still a decent number in circulation they will acquire a faster velocity, thus easing everybody’s shortage. Why isn’t this happening?

The only hypothesis I can form is that a lot of the cash is being illegally diverted, likely for the purpose of recirculation and regeneration of black money in new notes. Two managers of Axis Bank have been arrested, for example, on charges of laundering money and swapping old notes to the tune of Rs 40 crores (see this TOI report). Similar seizures of stashes of new notes are being reported across the country.

My guess is this sort of thing must be happening on a vast scale. One can earn big commissions by laundering old notes into new, leading to the generation of new black money.

Black money is a legacy of India’s socialist past. It can be curbed by reducing incentives for its generation, by having transparent laws and automatic procedures that reduce discretionary powers of bureaucrats, and reducing corruption in the income tax department.

Heavy-handed bans and further ‘socialistic’ measures could ramp up both black money and inequality, while enhancing the inequitous powers of the IT department, which may be used for further corruption. It’s been historical experience that if you induce shortages (of cash, or anything else), only the rich and/or well-connected elite will continue to have access to those resources, while the rest of us will lose that access; corruption, too, will increase. That’s basically why socialism has failed.

DISCLAIMER : Views expressed above are the author's own.

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“May you live in interesting times” was an ancient Chinese curse. We are witnessing a revolution of the mind as big, or perhaps bigger than independence – for the first time we believe that India can afford everyone a high standard of life. But can our institutions cope with rising expectations, or are they fated to collapse? Success can trigger a South Asian renaissance, failure may very well doom the idea of India. As it ponders some of these big, civilisational questions, this blog is an exploration of John Maynard Keynes’ belief that the difficulty lies not so much in developing new ideas as in escaping old ones.

Author

After drinking at various disciplinary streams, which included an engineering degree from IIT Kanpur and a doctorate in literature from the University of Pennsylvania, Swagato Ganguly now edits “The Times of Ideas”, the editorial page of the Times of India. He’s fascinated by ideas in all shapes, sizes and guises, whether well-cooked or medium-rare – but especially as they motivate everyday living. He’s also interested in the Indian middle class, in its uniqueness as well as globality. In his view Indian politics is torn between ideological extremes, and would do well to discover a liberal middle. His biggest weaknesses are movies, art, and brewing and sipping a good cup of coffee, for which he gets little time.

After drinking at various disciplinary streams, which included an engineering degree from IIT Kanpur and a doctorate in literature from the University of Pe. . .

Blog

“May you live in interesting times” was an ancient Chinese curse. We are witnessing a revolution of the mind as big, or perhaps bigger than independence – for the first time we believe that India can afford everyone a high standard of life. But can our institutions cope with rising expectations, or are they fated to collapse? Success can trigger a South Asian renaissance, failure may very well doom the idea of India. As it ponders some of these big, civilisational questions, this blog is an exploration of John Maynard Keynes’ belief that the difficulty lies not so much in developing new ideas as in escaping old ones.

Author

After drinking at various disciplinary streams, which included an engineering degree from IIT Kanpur and a doctorate in literature from the University of Pennsylvania, Swagato Ganguly now edits “The Times of Ideas”, the editorial page of the Times of India. He’s fascinated by ideas in all shapes, sizes and guises, whether well-cooked or medium-rare – but especially as they motivate everyday living. He’s also interested in the Indian middle class, in its uniqueness as well as globality. In his view Indian politics is torn between ideological extremes, and would do well to discover a liberal middle. His biggest weaknesses are movies, art, and brewing and sipping a good cup of coffee, for which he gets little time.

After drinking at various disciplinary streams, which included an engineering degree from IIT Kanpur and a doctorate in literature from the University of Pe. . .